Unlike what The Guardian wrote, Bitcoin is not anonymous by default. It is pseudonymous. If you use the same pseudonym (in this case, a key pair from your Bitcoin digital wallet) in multiple locations, then all that activity can be traced back to the same place. Like a street thug with an "AKA," it only works until you find one person who knows the alias and can say, "Yes, that guy is 'Fat Tony'."

Unless the user takes explicit steps when using his bitcoins to generate a new pair of keys with every transaction—something some wallets can do automatically, granted—then your activity on a site like Silk Road could theoretically be tied back to you, once the FBI pinpoints just what wallet identifiers the site's owner used to take in and pay out the funds.

Silk Road, while trying to provide its users with anonymity from each other (and ensure it got its cut—probably far more of the motivating factor), introduced a centralized point to an otherwise decentralized system, poking yet another hole in the process.

Bitcoins themselves are both anonymous and decentralized in how they are created and exchanged, yes. But when you begin introducing online wallets, sites acting as escrow providers, and similar such intermediaries, the system loses a little of both. Then you have the equivalent of a currency where the criminals almost volunteer to start using the digital equivalent of "marked bills" from those old FBI sting movies.

Internally, Silk Road used a mathematical process called a "tumbler" to try to make sure that never happened. It rolled the encrypted codes on each coin collected through lots of accounts before sending them on to the seller, making sure the input coin could never be matched to the seller or product. That also made it hard to determine just who was depositing funds to buy illegal things, and who was innocently picking up one of the (few) legal items for sale.

The theory was: it's not illegal to deposit money with someone like Silk Road if it cannot be traced to an illegal purchase. But that's easily dealt with. All it would take is a zealous federal prosecutor who rebrands Silk Road as a terrorist site (a small leap given that you could buy heroin on the site, and that's a drug often linked to Afghani groups that wear the terrorist tag, justly or not). Then all activity on the site immediately becomes illegal.

That's not what happened. But in spite of those extra measures put into place by Silk Road, academic researchers have been able to show how transactions could be traced back to Silk Road with relative ease. Forbes presented an excellent analysis of this problem in an article published just weeks before Silk Road's founder was nabbed by the feds.

The question, then, is whether or not the FBI used all of the computer records on the Silk Road system to start sniffing out buyers, or (more likely, since the buyers have no good information to snitch with in an anonymous marketplace) focused on sellers who transacted on Bitcoin. Even if they don't show up on particular doorsteps this time around, you can be pretty sure they've already used those records to build a list of whom to keep close tabs on.

If receiving large payments from Silk Road isn't probable cause enough for a wiretapping warrant, I don't know what is.

Which is probably a large part of why Congress is holding hearings on Bitcoin, and Ben Bernanke gave it a nod of the beard in light support.

It's not easy to trace or monitor bitcoins. And a careful user can definitely stay close to anonymous within the system—using a combination of an Internet anonymizer, new key pairs with every transaction, and a bit of tumbling to prevent patterns, for example.

But bitcoins are much more susceptible to tracking than either cash or gold, the current off-the-radar transaction tools most used to evade authorities.

The use of bitcoins, especially by most users—who tend to choose the very popular online wallet services that store your account info in a nice, easy-to-access, easy-to-subpoena, online vault—is exactly the kind of traceable activity that investigators froth over.

What's revolutionary is that it's a payments system with no third-party, like a credit card company, standing in between buyers and sellers. See, any time you buy something, it's a minor leap of faith. You choose to believe that the seller will deliver as promised—and if they don't, you want your money back. That's where financial intermediaries like credit card companies and Paypal come in. They make sure buyers and sellers are both trustworthy, and handle any disputes.

Now, it's nice to be able to get your money back if things go wrong, but that's not free. The middlemen take their cut. Bitcoin, though, has no middlemen. It's just a decentralized peer-to-peer system. So you can't get your bitcoins back if things go wrong, but there won't be any transaction fees. The question is whether non-enthusiasts will think this trade-off is worth it.

... The people who have bitcoins still have no reason to spend them, and the people who don't still have no reason to get them. They don't want a currency whose value you can't predict from one hour to the next. They don't want to buy things anonymously. And they don't want transactions to be irreversible (and certainly wouldn't want that if they got hacked).